Ownership concentration and expropriation in Chinese IPOs

This paper explores the ubiquitous deviation between large shareholders' control rights and cash flow rights by examining ownership concentration and expropriation in the unique context of Chinese IPOs. We find that IPO firms whose largest shareholders have control rights in excess of their cash flow rights underperform other IPOs by 32% and 26% on three-year post-IPO buy-and-hold returns (BHR) and cumulative abnormal (CAR), respectively. These firms also experience greater declines in operating performance post IPO, driven partly by the high likelihood of their undertaking value-destroying related party transactions. Their first day returns are also significantly lower than those of other IPOs, indicating that investors in secondary market partially anticipate the cost associated with excessive control. These findings strongly suggest that in an economy with disproportionate ownership structures, minority shareholders in newly listed firms face a greater risk of expropriation by controlling shareholders.